Nanophase Technologies Corporation: Staying Small

Jul.16.07 | About: Nanophase Technologies (NANX)

Nanotechnology, a broad field that essentially means the ability to create specifically designed compounds a few nanometers in size, has for many years been hailed as the next great breakthrough for solving a plethora of the world’s problems. At this size, the electrical, chemical and optical properties of the compounds are radically transformed, promising such things as more efficient electronic circuits, longer-lived batteries, improved drug-delivery systems, engineered biofuels, better lasers and more advanced imaging equipment.

But so far, successful commercial products based on the technology have been harder to find than a nanocrystal under a microscope. Nanophase Technologies Corporation (Nasdaq: NANX) founded in the late 1990s, has for the last several years been focused on getting real products to market rather than on simply creating new nanoparticles. It has partnerships with BASF, Rohm & Haas Company (NYSE: ROH), health care companies and others, through which it has developed more than 200 commercial products. Those products are now being used to create semiconductors with fewer flaws, better fuel cells, scratch-resistant and microbe-resistant coatings, and even better sunscreens and deodorants.

In April, it announced a new deal with Behr, a premium paint company that is using its nanoparticles to make a paint that resists mildew, has better adhesion and requires no primer. The paint will go on sale at The Home Depot, Inc.’s (NYSE: HD) stores soon. Last December Nanophase also signed a deal with a German company to produce a transparent coating that protects automobile paint from scratching.

Several analysts are hoping that signals a turning point for the company’s profitability and long-stagnant stock. Nikolay Tishchenko at Crown Global Capital, sees the potential for 30% to 50% annual revenue growth for Nanophase for the next several years. “Nanotechnology is breaking out of its limited applications and is at the early stage of exponential growth,” he says. “I like the company’s management and business model.”

Analysts consider Nanophase’s technology to be impressive even among nanotech companies. It has patents not just for the particles it produces, but for special processes such as coating the surfaces of the particles to make them stable in a wide variety of fluids, resins and polymers, prolonging their shelf-life. It can disperse its particles evenly in solution and keep them from sticking together for about 18 months before being used.

The question, however, is if these products can turn a profit – something that has eluded Nanophase and other nanotechnology companies for years. For the quarter ended March 31, its revenues were $2.9 million, up from $2.0 million a year earlier, with a net loss of $1.2 million, compared with a $1.5 million net loss a year ago. Its gross profit was $713,162, compared with $337,817 a year ago.

Investors haven’t bought the story yet. After reaching nearly $20 per share in 2000, the stock sank to as low as $3 and has been stuck around $6 since mid-2004. Nanophase’s market cap is about $115 million, just 40 times recent quarterly revenues. By comparison, Altair Nanotechnologies Inc. (Nasdaq: ALTI), which just signed its own deal to create a joint venture with Sherwin-Williams and announced a $2.2 million order to produce batteries for electric-power SUVs, has a market cap of $244 million, a hefty 213 times quarterly revenues. ALTI’s first quarter revenues more than doubled, to $1.14 million, but it reported a $5.18 million net loss.

The issue now is volume. Nanophase is highly leveraged because of two manufacturing plants that can already produce more than twice their current capacity. But management is so confident that on July 2 it issued 1.9 million new shares to raise $10.6 million, primarily to expand capacity further. Tishchenko agrees with that approach. “All NANX needs to do now is ramp up” to start seeing a profit, he says.

Still, John Roy with W.R. Hambrecht & Co. is skeptical. Although its particles are already appearing in everything from sunscreen to semiconductor equipment, the added price has kept demand relatively low. Nanophase has to prove that the product improvements its nanoparticles offer outweigh the extra cost. “The advanced materials Nanophase has are better, but are customers buying?” says Roy. “It looks like they could reach profitability with higher volume, but we’ve been waiting for that for a long time. All the products we thought would be breakouts haven’t been.” Roy is sticking to his long-time “Neutral” rating.

The company’s deal with Behr holds the best near-term potential, since the paint is in production and ready to go to market at a high-volume retailer. Better paint isn’t exactly the kind of breakthrough that the nanotechnology proponents have promised so breathlessly for so long, but if customers are willing to pay for it, it could prove to be a breakthrough of another kind – a nanotech product that actually turns a profit.

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